Twelve Lessons: What I’ve Learned About Fund Investing

By Brendan Conway

Today is my last day as a Barron’s columnist and blogger. I’m leaving to take up a position at Goldman Sachs Asset Management. Serving this readership day in and day out, in a lucky two-plus years of being paid to learn, ask questions and report it all back to you, has been an honor.

Here are the most important things I learned during two-and-a-half-years of covering fund investing for Barron’s. Yes, there’s a bit of self-plagiarism from the weekend Barron’s ETF column, so consider this the unabridged version.

1. For smalltime investors, index funds and ETFs are fine core holdings. Few stock-fund managers stay ahead; in fact, it’s fewer than random chance would predict. Over the last five years, nearly three-quarters of large-cap fund managers were beaten by the S&P 500. Merely being “average,” meaning matching the index or some other benchmark, turns out to be a pretty good deal. You could do a lot worse than, for instance, a simple three-fund portfolio of Vanguard S&P 500 (VOO), Vanguard Total World Stock Index ETF (VT) and iShares Core U.S. Aggregate Bond ETF (AGG). It’ll cost you perhaps $10 a year for every $10,000 you invest, depending on how much of each fund you own.

2. The just-named merits aside, there’s no holy writ for passive investing. Low costs are one of the secrets of passive investing’s success, but there are active funds which are also low cost. What will your passive ETF do in the next bubble? It’ll buy the bubble; that’s what passive ETFs do. Index-based investing is great most of the time. But active managers, for all of their challenges, can choose what to buy and when. So can you. Some self-styled value investors, like Meb Faber of Cambria Investment Management, and contrarians such as Jeremy Grantham and Ben Inker of GMO, the latter of whom interviewed here with colleague Jack Otter, are wary of the entire U.S. stock market. If you share their view, rebalance your portfolio, meaning sell some winners and buy some losers. Don’t let the last five years’ surge in U.S. stocks and the multi-decade boom in bonds come back to bite you. Even if you don’t share their views, you should still rebalance.

3. Management fees are one of the few things you can control, so control them.Don’t pay 0.67% to owniShares MSCI Emerging Markets(EEM). Pay half a percentage point less to own Schwab Emerging Markets Equity ETF (SCHE). Certainly don’t pay 1%, 1.5% or more for an actively managed fund unless you’re certain the manager is worth it and, ideally, if your time horizon is short. In the risk-reward trade-off, you’re taking all of the investment risk. Don’t give your manager the reward. If 1% a year doesn’t sound like much, consider that the long-run return of the stock market is something like 6%-9%. If it’s only 3% in the next decade, you’re handing over one-third of your potential return! Don’t do it.

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There are 16 comments

AUGUST 20, 2014 12:10 P.M.

daryl wrote:

are you sure you didn't mean 3/4 of large cap fund managers DON'T beat the s&p 500?

AUGUST 20, 2014 12:13 P.M.

Brendan Conway wrote:

D'oh! Thank you, Daryl. You are right.

AUGUST 20, 2014 3:17 P.M.

Retired wrote:

You'll be much missed, Mr. Conway. Our best wishes go with you to Goldman Sachs. I'm sure they feel very fortunate that you are joining them.

AUGUST 20, 2014 4:05 P.M.

Craig wrote:

Mr. Conway, I have enjoyed, and benefited, from your columns over the past few years and I echo the comment from "Retired" that you will be missed by Barrrons' readers. Thank you and best wishes in your new endeavor!

AUGUST 20, 2014 4:36 P.M.

James Kimball wrote:

Best of luck Brendan...some very, very good advice. Three points which weren't addressed, though.

One, why doesn't the press ever discuss the "risk" in index funds...-50% drops in the market-cap-weighted indexes in 2000-2002 and again in 2008-2009. Believe me, clients/investors always end up bailing out at the wrong time during such severe drops.

Two, why doesn't the press ever seem to recommend equally-weighted indexes? I'm not so sure many even know what they are and how they've outperformed their counterparts...with better diversification.

Three, the press always seems to espouse the simplicity and no-worry route of simple indexing to accomplish your 10% per year. Funny how you don't read about it nearly as much at market bottoms...when everyone is bailing out. What are the majority of index funds buying at the moment? Hundreds of stocks hitting 5-6 year highs. What are they selling? Dozens of stocks hitting multi-year lows.

Take care and best of luck at GS Brendan.

AUGUST 20, 2014 7:14 P.M.

Terry wrote:

Great article I will share with friends and family. Best wishes @GS

AUGUST 20, 2014 7:35 P.M.

Georges wrote:

I'd like to recommend you guys also to read the article "Can ETFs Be Derailed" from August 4th. week. mod=BOL_archive_twm_ls

AUGUST 20, 2014 8:37 P.M.

JD wrote:

nice article

AUGUST 20, 2014 9:26 P.M.

Ernie Mac wrote:

Great "swan song" article! Thanks for your insights and good luck in your new endeavors at Goldman.

AUGUST 20, 2014 10:25 P.M.

Anonymous wrote:

Thanks a million Brendan. I enjoyed reading your articles and benefited from them. Is there a way for me to access past articles of yours. Also will try to follow you in the future. Take Care and best of luck at GS.
Dan Asrani.

AUGUST 21, 2014 4:13 A.M.

Ralph wrote:

The comparison of active versus passive only goes back five years. As a result, the advantage of active fund cash reserves during market downturns (2008) is not considered.

AUGUST 21, 2014 12:33 P.M.

Geo wrote:

Congratulations, you have moved from a capo to boss.

AUGUST 21, 2014 2:32 P.M.

Pat wrote:

Could you comment on #10? Why not GLD, and what would you consider the right reason to put a portion of your money in gold if not as a safe haven? Thanks and good luck in your new job.

AUGUST 22, 2014 7:12 A.M.

Dan Weiskopf wrote:

Your reporting was always part of my daily routine. When I was on vacation I could always count on your tweets to force me back into the trenches and stay connected. Thank you for the insights.Hope to hear from you on the other side.

AUGUST 28, 2014 10:18 P.M.

Dash Hardtack wrote:

Write when you find work.........

OCTOBER 16, 2014 12:54 P.M.

Avi Bee wrote:

I'm disapinted you switch side and go to work for a company who os harming the small investores and the 'people'

About Focus on Funds

As exchange-traded funds and other investing vehicles have ballooned in number, the task of figuring out what works well and what doesn’t has only gotten harder. Barrons.com’s Focus on Funds looks under the hood of ETFs, mutual funds and hedge funds for overlooked values, actionable ideas and the latest pitfalls for fund investors.

Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.